More on Regen’s view of the future of CfDs can be found in our response to the Review of Electricity Market Arrangements (REMA) here.
As part of their recent consultation on changes to future rounds of Contracts for Difference (CfD) scheme, the government has indicated their intention to potentially consult on whether factors beyond price should be taken into account when awarding CfD contracts to renewable developers.
The purely price-based CfD mechanism, with highly competitive auctions, has been effective at driving down the strike price of CfD contracts which, as these projects are delivered, will reduce the cost of renewable energy technologies and provide savings for billpayers.
Wider criteria have been introduced into the qualification stages of the CfD process, including the enhancement of requirements for projects to have a supply chain plan. However, the CfD scheme is still predominantly based on a final price-only auction in which the lowest strike-price per MWh of energy is awarded a contract.
As a result, the scheme may be under-valuing other important objectives of renewable energy deployment including:
For example, the current CfD mechanism does not account for energy system benefits when allocating financial support, instead valuing each generated unit of energy equally, irrespective of where and when the electricity is generated. Yet, in our recent paper ‘Go West’, we highlight the significant benefits to be reaped from a geographically diverse offshore wind portfolio and, in particular, for capacity off the west coast to play a vital role in energy system balancing, energy security and price stability. As these aims become increasingly important, the government should consider how incorporating a regional aspect to the CfD could support diversity of supply to reduce whole system costs and increase system resilience.
In addition, by creating a race to drive down prices, the CfD at present does not encourage supply chain development, putting the growth of a viable future supply chain for UK plc at risk. Factoring in the aim for CfD projects to build significant local supply chain capabilities will be key to keep the economic and social value of the renewable energy industry within the UK, building on our existing strengths.
There is also potential for the CfD to support the delivery of community benefit from new renewable energy developments. Ensuring communities receive a direct financial benefit is important to recognise the physical impact that developments have on hosting communities and to provide funding that communities can steward towards local initiatives in an inclusive and equitable way. Our recent paper examines potential models for delivering local benefit from offshore renewables, including the option of a mandatory minimum community benefit payment for CfD developers.
As the UK enters a critical stage in its decarbonisation and energy security journey, with the need to invest circa £200 bn to decarbonise the power sector and over £100 bn in network infrastructure, it is essential that revenue support mechanisms are closely aligned with the overall net zero energy strategy. The challenge for policy makers is to achieve this while still maintaining a downward pressure on energy cost and consumer bills.
Whilst not all the objectives listed above can, or should, be delivered via the CfD scheme, or within that via a CfD price mechanism, we encourage BEIS to pursue a detailed consultation on non-price criteria which looks holistically at the CfD scheme to determine the extent to which it could better support, or at least not hinder, wider energy system and economic outcomes.
